WEEKLY MACRO ANALYSIS

Real Savings Rate 0.9%, Not BEA’s 6.9% Consumers in Worse Shape Than Government Statistics Indicate TrimTabs Estimates U.S. Economy Sheds 472,000 Jobs in June
Spotlight: Real Savings Rate 0.9%, Not BEA’s 6.9%; Year-over-Year Growth in Wages and Salaries -4.8% in May, Not -1.1% as BEA Reports The U.S. economy is in far worse shape than U.S. government statistics indicate. The Personal Income report released Friday by the Bureau of Economic Analysis (BEA) grossly overstates personal savings, wages and salaries, and personal income. Real-time data indicates the personal savings rate was 2.8% in May, not 6.9% as the BEA reports. Worse still, when savings is adjusted for the impact of the “Making Work Pay” tax credit and one-time stimulus payments to recipients of Social Security and other government retirement programs, the real savings rate drops to 0.9%. In addition, real-time tax data indicates wages and salaries fell 4.8% y-o-y in May, not 1.1% y-o-y as the BEA reports. And while the BEA reports that personal income rose 0.3% y-o-y in May, real-time tax data shows it fell 3.6% y-o-y. Consumers are in much worse shape than government statistics suggest and have little money left over to repair their tattered balance sheets. Bottom Line In response to a question about a potential economic recovery, Warren Buffett quipped, “You can’t produce a baby in one month by getting nine women pregnant.” We agree with Mr. Buffett. We do not expect economic growth to turn positive until sometime in 2010. Real-time data shows the economy lost 472,000 jobs in June, far exceeding the revised 380,000 job loss in May. The unemployment rate is likely to hit 9.7% to 9.8% in June, and it could hit 10.0% in July. Other indicators confirm the labor market’s weakness. Weekly unemployment claims and continuing unemployment claims reversed course in this past week after declining for several weeks. While the TrimTabs Online Job Postings Index rose 3.2% in June, it is still consistent with an extremely weak labor market. Also, real-time data indicates declines in wages and salaries are accelerating. Mortgage rates pulled back in this past week, but they are still much higher than earlier this year. We believe forecasters pricing in a housing recovery by the end of 2009 will be in for a nasty surprise.

Statement, show the economy is contracting much faster than the BEA is reporting. Using this real-time data, we estimate the savings rate was only 2.8% in May. Backing out the impact of the “Making Work Pay” tax credit and the one-time payout to Social Security and other government retirement beneficiaries in May, and the savings rate drops to 0.9%. The BEA does not use real-time data to compute its most recent estimates of wages and salaries. Instead, it uses the Quarterly Census of Employment and Wages (QCEW), which is based on quarterly tax reports submitted to state unemployment agencies. The QCEW covers more than 8 million employers subject to state unemployment insurance laws, and it captures the wages and salaries of 99.7% of all workers. To compute current wages and salaries, the BEA interpolates and extrapolates the lagged QCEW data forward, using inputs from the Bureau of Labor Statistics to make necessary adjustments. The May 2009 BEA personal income data is based on QCEW data from Q4 2008. Unfortunately, the QCEW data does not fully reflect wage declines across the entire labor market. The QCEW is essentially an unemployment survey. Most employers pay unemployment taxes on only a small portion of their workers’ salaries, and most of these payments are made at the beginning of the year. So the QCEW data from Q4 2008 only captures unemployment taxes paid by workers hired late in the year, not the entire workforce. The BEA reported that in May—in the midst of the worst economic downturn since the 1930s—personal income rose 0.3% y-o-y, while wages and salaries fell only 1.1% y-o-y. When we incorporate real-time data into the results, we find that personal income fell 3.6% y-o-y, while wages and salaries dropped 4.8% y-o-y. In addition, personal savings drops from a reported $769 billion, or 6.9% of disposable personal income, to $302 billion, or 2.8% of disposable personal income.
Reported by Bureau of Economic Analysis - May 2008 $12,220 $1,148 $11,072 $10,544 $528 4.8% Reported by Bureau of Economic Analysis - May 2009 $12,261 $1,172 $11,089 $10,320 $769 6.9% Reported by TrimTabs Using Income Tax Withholdings May 2009 $11,776 $1,154 $10,622 $10,320 $302 2.8%

confirms the year-over-year declines that we are measuring. We believe real-time tax data is a better measure of wages and salaries than the BEA’s analysis using six-month-old data. BEA Consistently Underestimates Income Growth in Expansions and Overestimates Income Growth in Contractions We compared the BEA’s initial personal income estimates from 1997 through May 2009 to its revised estimates. We found that the BEA consistently provides policymakers and budget forecasters with an inaccurate picture of the economy’s health. Since the BEA uses lagged data to calculate its initial estimates, it underestimates income in expansions and overestimates income in contractions. The graph below shows the difference between the BEA’s initial estimate of personal income and its revised estimates of personal income from 1997 through May 2009. To summarize, from January 2001 through May 2001, the BEA underestimated personal income. From June 2001 through October 2004, the BEA overestimated personal income. From November 2004 through May 2007, the BEA underestimated personal income (the big downward spike in August 2005 was due to Hurricane Katrina). Finally, the BEA has been overestimating personal income since June 2007.
BEA Personal Income Revisions (%) January 1997 through May 2009

Employment U.S. Employment Our real-time indicators suggest the U.S. economy lost 472,000 jobs in June after shedding 380,000 jobs in May. Our proprietary model uses income tax withholdings to compute real-time employment. In addition to job losses, two other factors affected year-over-year growth in withholdings in May: 1. Wage deflation. Our employment calculation for June assumes wage deflation was 1.5%. Since the beginning of this year, employers have been reducing weekly hours or cutting wages rather than laying off employees. We estimate that 8% of companies have cut wages by about 10%. In a normal growth year, wage inflation is between 3.0% to 4.0%. 2. “Making Work Pay” tax credit and Cobra reimbursement. We increase year-over-year growth in withholdings by 4.0% to account for the “Making Work Pay” tax credit, which employers began to implement in March. The Cobra reimbursement plan was implemented on April 1. We estimate the economy shed 5.3 million jobs in the past 12 months, the largest annual job loss in our records dating to 1970. Table A.1 in the Appendix provides details of the employment calculation for June.
TrimTabs Estimate of Employment Growth January 2006 Through June 2009 400,000

TrimTabs Online Jobs Postings Index The TrimTabs Online Job Postings Index rose 0.4 points, or 0.6%, to 64.8 in the week ended June 26. The index has risen 2.0 points, or 3.2%, in June after holding steady in May, suggesting online job demand has hit a bottom. This trend is supported by the monthly Monster Index, which has been holding steady since January.
TrimTabs Online Jobs Index vs. Weekly Unemployment Claims March 2, 2001, through June 26, 2009 200
TrimTabs Online Jobs Index

700,000 650,000 600,000
Recessions

180 160 TrimTabs Online Jobs Index 140 120 100 80 60 40 20 0

Weekly Unemployment Claims - 4 Week Moving Average

550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000

Week

Source: TrimTabs Investment Research – www.trimtabs.com

Unemployment Claims Seasonally adjusted unemployment claims climbed 15,000 to 627,000 in the week ended June 19 from an adjusted 612,000 in the previous week. Weekly unemployment claims fell for four consecutive weeks from early May through early June, then they reversed course two weeks ago. The four-week moving average edged up 500 to 615,750 from an adjusted 617,250 in the previous week. The four-week moving average has exceeded 600,000 for 20 consecutive weeks, signaling large monthly job losses. Continuing unemployment claims increased 29,000 in the latest reporting week to 6.74 million. The latest week’s increase puts continuing claims just below the record high of 6.84 million reached two weeks earlier. High weekly unemployment claims will keep continuing claims elevated.

Source: Bureau of Labor Statistics – www.bls.gov Income Federal tax deposits are among the most reliable measures of the economy’s health because they mirror shifts in income and employment. These deposits indicate incomes are falling much faster than the government is reporting. We track three categories of daily tax deposits: income taxes withheld from employee salaries; taxes on “other” sources of income such as capital gains, dividends, and self-employment income; and corporate income taxes. This data is extremely volatile from day-to-day, but year-over-year comparisons can produce a reliable snapshot of the economy’s health. Income Tax Withholdings Income tax withholdings dropped 11.9% y-o-y in the past two weeks and 10.0% y-o-y in the past four weeks. Withholdings fell 9.8% y-o-y in June after falling 8.8% y-o-y in May. Adjusting for the “Making Work Pay” tax credit, withholdings fell 7.9% y-o-y in the past two weeks, 6.0% y-o-y in the past four weeks, and 5.8% y-oy in June. We estimate that after-tax income from wages and salaries will be down about $260 billion this year relative to last.

“Other Income Tax Not Withheld” “Other income tax not withheld”—paid on self-employment income and capital gains on stock and real estate transactions—plunged 33.7% y-o-y in June after falling 33.4% y-o-y in May. So far this quarter, “other” taxes are down 35.6% y-o-y. We estimate that income from “other” sources will be down $430 billion this year relative to last. Corporate Income Taxes and Refunds Corporate tax payments fell 35.5% y-o-y in June after falling 12.3% y-o-y in May. Corporate income taxes are very low in May, so we typically ignore the May results. So far this quarter, corporate tax payments are down 37.7% y-o-y. So far this year, corporate income tax refunds have totaled $71.4 billion, up $35.9 billion, or 101.2%, from $35.5 billion in the same period last year. Corporate refunds have amounted to 65% of the corporate income taxes collected this year. Table A.2 in the Appendix summarizes tax data from 1999 through 2009.

Housing Mortgage Applications Freddie Mac reported that in the week ended June 19, the average interest rate on a 30-year mortgage retreated 21 basis points to 5.38%. Last week, mortgage rates edged up 4 basis points to 5.42%. As a result of lower mortgage rates in the past two weeks, the Mortgage Applications Composite Index gained 6.6% to 548.2. Breaking this index into its components, the Mortgage Purchase Applications Index increased 7.3% to 280.3. Meanwhile, the Mortgage Refinance Applications Index, which is more sensitive to mortgage rates, plunged 5.9% to 2116.3. In the current reporting week, mortgage refinance applications accounted for 54% of all mortgage applications and 53% of prospective loan volume. Demand for mortgage refinancings has fallen steadily since mid-April, when refinance applications accounted for 79.7% of all applications and 80.2% of prospective loan volume. The Federal Reserve has been aggressively buying mortgage-backed securities (MBS) and Treasury securities to try to lower borrowing costs mortgage rates. In the week ended June 26, the Federal Reserve purchased $22.3 billion in MBS and $10.8 billion in Treasuries. Since the beginning of this year, the Fed has purchased $606.9 billion in MBS and $180.8 billion in Treasuries. The Fed stated in this past week that it would not increase its purchases of Treasuries. As a result, we think mortgage rates are unlikely to drop below 5%, which will put some pressure on the housing market.
Weekly Mortgage Applications Purchase Index January 5, 1998, through June 19, 2009 550 525 500 Mortgage Applications Index Value 475 450 425 400 375 350 325 300 275 250 225 200

California Foreclosure Trends Foreclosure trends in California offer insight into national foreclosure trends and the health of the housing market. California is the nation’s most populous state and has the highest number of subprime and Alt-A mortgages and the highest number of distressed homes. In the week ended June 26, there were 4,278 new foreclosures in California, down 1,053, or 19.8% from 5,331 in the previous week. The rapid decline in foreclosures in the past two weeks suggests the new California foreclosure law that went into effect on June 15 is having its intended impact. Foreclosure activity may decline for a few more weeks as lenders sort through the requirements of the new law. Then we expect foreclosures to rise again. While the subprime wave of mortgage defaults has peaked and is now declining, holders of Alt-A mortgages are beginning to default in increasing numbers. About one-third of Alt-A mortgage holders are facing interest rate resets this year and will not be able to refinance because current property values are, on average, 25% below current loan values.
Weekly Trend of California Foreclosures September 2006 through June 26, 2009
Passage of CA Law SB1137 Lengthens Foreclosure Notification Process New California Law Lengthens Foreclosure Process 90 Days

New and Existing Home Sales New and existing home sales rose 108,000, or 2.2%, to 5.00 million in May, up from 4.98 million in April. In the past two months, new and existing homes sales increased 4.6%, offering some hope that the housing market has bottomed. In another positive sign, the increase in home sales in May caused the inventory of unsold homes to decline 146,000, or 3.5%, to 4.1 million. May sales pushed the supply of unsold homes to 9.6 months from 10.2 months in April. The new California foreclosure law will probably cause inventory to decline further, reducing pressure on prices this summer. The average sales price of unsold homes nationwide rose $6,800, or 3.3%, in May, the biggest increase since January.
Total New and Existing Home Sales January 1999 through May 2009 9,000,000 8,500,000 8,000,000 7,500,000 7,000,000 6,500,000 6,000,000 5,500,000 5,000,000 4,500,000

Inventory of Unsold New and Existing Homes versus Months Supply of Unsold New and Existing Homes January 2005 through May 2009 5,500,000 14 13 5,000,000 Inventory of Unsold New and Existing Homes
Total Inventory of Unsold New and Existing Homes - Left Axis Months Supply of Unsold Homes - Right Axis